Buoyed by strong rebounds in both German Retail Sales and unemployment data, the EURUSD held steady in early European trade holding the 1.5750 level.
Talking Points
• Japanese Yen: Tankan at 4 year low but better than expected
• Australian Dollar: RBA turns neutral suggest no more hikes this year
• Euro: German Retail Sales and labor data rebound strongly
• British Pound: PMI Manufacturing
• US Dollar: ISM Manufacturing on tap
Pound Nears 2.00 Euro Holds Steady –Will US Manufacturing Worsen?
Buoyed by strong rebounds in both German Retail Sales and unemployment data, the EURUSD held steady in early European trade holding the 1.5750 level. German Retail Sales improved markedly rising 0.7% versus –1.1% decline the month prior. Most of the gains however were driven by higher petrol prices while the combined May and April results were still 2.25% lower than the average in Q1 of this year.
Labor markets also saw better results as German unemployment decreased by –38K far better than –14K forecast. After last month’ s increase in unemployment – the first in more than 2 years – some analysts feared that Germany’s job engine may have come to a grinding halt creating a potential problem for economic growth in the second half of 2008. Today’ s news however, puts some of those worries to rest and suggests that ECB has scope to tighten monetary policy further without causing undue damage to the EZ economy.
We have always argued that as long as employment in the region continues to expand European monetary authorities will have a relatively free hand in setting policy without too much interference from politicians in the region. Today’s strong improvement in German labor data indicates that Mr. Trichet and company will most likely take advantage of the supportive economic data and raise rates another 25bp this Thursday.
Pound meanwhile came within a whisker of the 2.0000 figure in early London trade as demand for GBPJPY drove the pair higher on the open but it hit a wall after disappointing UK PMI Manufacturing data which printed at 45.5 well below consensus estimate of 49.8. The manufacturing sector now stands deep in contraction territory and may make it more difficult for BoE to remain neutral for the rest of the year especially if manufacturing deteriorates further dragging down overall growth.
Manufacturing will be the center of attention in North American session as well today as traders will parse the latest data from ISM Manufacturing survey. Market players will focus on the prices paid component to gauge the impact of soaring energy prices on manufacturing inputs as well as the employment data to handicap the NFP release due on Thursday. The leading indicators are mixed with both Empire and Philly showing weakness but Chicago PMI coming in a bit better than expected yesterday.
Finally oil is once again likely to be a key driver of trade. After setting a new high, crude traded down yesterday, perhaps suggesting that demand destruction is finally starting to take hold. If crude prices see a sharp retrace, the greenback may get a reprieve irrespective of the economic data on the US calendar today.
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